Feb 7, 2013, ArtuM comment on Seeking Alpha
Stocks: Are They Worth All Of The Drama? [View article]
Hi gotchurback,
great exchange on your part. Here is my take on option use for TLT:
"Short duration protective puts"... - I would not buy protective puts outright. Traders use Put Spreads to limit their exposure... with weekly options now in place for TLT they have their "magic" use. Let me bring some numbers and then comment on them.
02.07'13, THU: At this time TLT = $117.22 and I check TLT options:
Apr'13 Put 116 = 2.50 / 2.54
Apr'13 Put 117 = 2.99 / 3.05
Mar'13 Put 116 = 1.58 / 1.60
Mar'13 Put 117 = 2.04 / 2.05
Feb'13 Put 116 = 0.44 / 0/46
Feb'13 Put 117 = 0.80 / 0.82
Let's assume I analyze the above ratios to do BACK SPREAD: Sell 10 and Buy 11.
Apr'13: 2.99*10 - 2.54*11 = 1.96 *100 = $196 CREDIT
Mar'13: 2.04*10 - 1.60*11 = 2.8*100 = $280 CREDIT
Feb'13: 0.80*10 - 0.46*11 = 2.94*100 = $294 CREDIT
For Feb'13 I have the best time / profit ratio, but with 10 days till expiration it is too risky that TLT will end up in the mid of 117 and 116 => LOSS. Thus I would go with Apr'13 Spread to have more time for events unfold.
If TLT moves higher $117.5+, my Credit Spread starts to bring profit and at some point I may say "OK. you did great job, now I close you"
Other move: I wait longer to collect Time Value of the Spread and at the last week see if 116 Put = 0.2 and there is still a probability to monetize on it.
If TLT moves lover $117- , than I have time for Buy side to go into effect and close position with 1 month left at a smaller loss.
NOW! The Magic of Weekly options lies here: instead of waiting for 2.5 months for Ratios come into my favor, I get those Advantageous Ratios with 10 days remaining:
Feb'13 Put 116 = 0.44 / 0.46
Feb'13 Put 117 = 0.80 / 0.82
It means I may buy not 11, but 15 contracts and still have profit potential. I also may move to further Out-Of-Money (OOM) Spread, which brings me even more safety:
Feb'13 Put 115 = 0.23 / 0.24
Feb'13 Put 116 = 0.44 / 0.46
or
Feb'13 Put 114 = 0.21 / 0.12
Feb'13 Put 115 = 0.23 / 0.24
Can you feel the Magic :) ?
Hope the analysis brings some clarity.
If you'd like me to perform similar analysis for your needs, let me know.
Warm regards,
ArtuM